Question

Due to erratic sales of its sole product-a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (13,300 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 399,000 199,500 199,500 222,000 $ (22,500) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $88,000 per month. If the president is right, what will be the increase (decrease) in the company's monthly net operating income? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $38,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,200? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $51,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. b. Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,100 units)?

Answer 1

Requirement 1 Contribution Margin ratio Break even point in units Break even point in sales dollars 50% 14800 444,000 Requirement 2 Increase in contrbution marign (88000*50%) $ Less : Increase in advt costs $ Increase in net operating income $ 44,000 (6,300) 37,700 Requirement 4 Unit sales to attain target profit = (Fixed cost + Target proft) / CM per unit (222000+4200)/14.30 15818 Units $ Note: Contribution Margin ratio 199500/399000 Note : CM per unit; Seling Price Less : Revised variable cost Contribution margin per unit Requirement 3 Current Seling price Revised seling price = 30*90% 50% $ $ 30 27 $ $ $ 30.00 (15.70) 14.30 Break even point in units = Fixed Cost / Cm per unit 222000/15 14800 Units Sales (13300*2*27) Less : Variable Costs (13300*2*15) Contribution margin Less : Fixed costs Net Operating income $ 718,200 $ (399,000) $ 319,200 $ (260,000) $ 59,200 CM per unt = 199500/13300 $ 15 Break even point in sales dolars = Fixed Cost / Cm ratio 222000/50% 444000

Requirement 5(a) Requirement 5(b) Automated Contribution Margin ratio Break even point in units Break even point in sales dollars 60% 15167 455,000 Total Total $ Contribution income Statement Not Automated Per Unit % 603,000 30 100% $ 301,500 15 50% $ 301,500 15 50% $ 222,000 $ 79,500 $ Sales (20100 Units) $ Variable Expenses $ Contribution margin $ Fixed costs $ Net Income $ Note : Selling Price Less : Revised variable cost Contribution margin per unit Per Unit % 30 100% 12 40% 18 60% 603,000 241,200 361,800 273,000 88,800 30 -12 18 Requirement 5(c.) Yes The Company should automate the operations Contribution Margin ratio 18/30 60% Break even point in units = Fixed Cost / Cm per unit (222000+51000)/18 15167 Break even point in sales dolars = Fixed Cost / Cm ratio (222000+51000)/60% 455000 Note : Please comment down for any further clarifications